Ladies: mind the pension gap

Maike Currie
Maike Currie
Fidelity Personal Investing28 March 2017

How would you describe your perfect retirement? Perhaps you picture yourself taking long walks in the countryside or lounging on a cruise ship somewhere in the Mediterranean? Either way, once the so-called ‘Third Age’ arrives, you’ll no longer be a wage slave and that means you will need some form of income to cover your living costs.

Typically, we have three sources of income in retirement: 1.) the State Pension 2.) a workplace pension and 3.) any other private savings. Perhaps you’re lucky enough to have a substantial amount in each of these three pots. If you’re a woman, however, chances are that one of these pots or, in the worst case, all three, look rather empty.

There are reasons for this, the most likely being lower paid work or a career break to take care of the family. Both inevitably dent your pension savings and a smaller pot means a smaller income in retirement. The Cridland report highlights that women are likely to have 25% lower income on average than men in their first year of retirement. Yet, it is a well-established fact that women, on average, live longer than men.

When it comes to retirement, there’s a glaring pension gap between the two sexes. If a longer life with less money than your male counterparts doesn’t sound like the kind of retirement you dreamed of, it’s prudent to examine each source of pension income in turn: your State Pension, workplace pension and private savings and address any potential shortfalls.

Your State Pension

The State Pension can be a hugely complex beast undergoing some major changes in recent years. I’ve distilled this down into five key things most women should note. The first is that no matter how frugal you are, the State Pension is not enough to enjoy a comfortable life on. But it is an important part of anyone’s overall retirement planning. Many retirees rely on this money as a guaranteed income every month to cover their basic living expenses.

Second, the old two tier system, which saw two State Pension systems: the Basic and the Additional, was replaced last year with a new single-tier pension of £155.65 per week. The years of national insurance contributions or credits needed to qualify for the full basic State Pension is rising from 30 to 35 years under the new system, with anyone showing less than 10 years on their NI record not getting any pension at all.

The third important point to note is that changes to the women’s State Pension age, which is rising from nearly 63 now to 65 by 2018 means only 80,000 women will receive the new flat-rate State Pension from 2016 to 2018, compared with 390,000 men, according to figures by the Department for Work and Pensions.

Four: the ability to inherit your spouse’s pension used to be a key benefit for women who have not built up a decent pot themselves, however this will disappear under the new State Pension system.

Finally, having children could impact your State Pension. Say what? It all boils down to a change in the child benefit landscape. Families where one parent earns more than £60k can no longer claim child benefit without facing a tax charge.

Unsurprisingly many people have stopped claiming, with higher earning families shunning the benefit due to no perceived financial upside. Here’s the rub: failing to apply means you don’t get the national insurance credits towards your State Pension and you won’t bank State Pension entitlement. So while women may not end up with money in their pocket by submitting a form, they will be putting away savings towards their retirement.

Useful links on this include the Child Benefit Tax Calculator which gives information on whether you will be hit by a tax charge. The claim form can be found here

Workplace pension

Ok, so the State Pension comes with a lot of caveats and complexities, but fortunately you’ve been saving into a workplace pension. That’s a good thing, but in reality even if a woman does regularly contribute to a private or workplace pension, it is likely that at some stage you may take a career break to start a family. This will inevitably impact how much you save into your pension.

Perhaps you leave the workforce altogether. British parents shoulder some of the highest childcare costs in the world, and many women calculate that they simply cannot afford to go back to work after having kids.

If you’re taking time out of work in order to have children, there is a very real chance that you could be missing out on salary increases and opportunities for promotion that might otherwise have been available. If you earn less, you can save less, which inevitably means you are left with a smaller pension pot.

Auto-enrolment requires that you earn over £10,000 a year to be automatically enrolled in an employer’s pension scheme and this rule doesn’t take into account overall earnings from different employers. Consequently, many women fall through the cracks of auto-enrolment choosing to work part time or opting for less paid work for several employers.

If you earn less than £10,000 overall or you don’t earn more than £10,000 with any one employer, then you need to take things into your own hands. A SIPP (self-invested personal pension) can step in when employer offerings fail, or if you’ve chosen to work for yourself. Remember that there is no substitute for a regular income in retirement - a pension gives you this.

Private savings

Every woman should have her own savings pot – separate from her partner’s or family’s savings. Make sure you have a rainy day fund set up. The ISA allowance can be passed between married couples and civil partners on death and this means you can inherit your husband’s ISA when they pass away and continue to benefit from the tax free income and capital growth of the ISA pot.

If your husband is working, and you’re looking after the children, make sure you talk about your ISAs, and stipulate clearly in each of your wills whether you intend on leaving your ISA to your other half. This will be a sensible approach from a tax planning point of view too.

As patronising as it may sound, ‘a man is not a financial plan’. It is important for women to invest and save in their own right. If you are raising children and managing the family home it is unlikely your existing pension benefits will be vast. This, coupled with rising life expectancy, means it is crucial to save enough towards your retirement. Have a look at all three pots - state, workplace and private - and make sure you have minded any glaring gaps.

Important Information

The value of investments and the income from them can go down as well as up and investors may not get back the amount invested. This information does not constitute investment advice and should not be used as the basis for any investment decision nor should it be treated as a recommendation for any investment. Eligibility to invest into an ISA or pension and the value of tax savings depends on personal circumstances and all tax rules may change. You will not normally be able to access money held in a pension till the age of 55. Fidelity Personal Investing does not give personal recommendations. If you are unsure about the suitability of an investment, you should speak to an authorised financial adviser.